The question of whether to change the venue of Patriot Coal’s Chapter 11 case to West Virginia from the Southern District of New York is proving to be not only a contentious one for the parties involved, but also a vexing one for Bankruptcy Court Judge Shelley Chapman, if a two-day hearing this week in Lower Manhattan was any indication.
The venue hearing went on longer than most had anticipated, with day one lumbering through arguments from the proponents of a venue change – led by the United Mineworkers of America and the U.S. Trustee – and day two’s proceedings running an epic 13 hours, ending around 11:00 p.m. EDT without a ruling.
Unsurprisingly, Chapman said she would issue a decision at a later date, though she did not commit to a specific time frame. Given the controversial legal issues involved, and the considerable discretion the law affords Chapman in deciding the matter, she may want to issue a detailed written opinion explaining her specific factual findings and legal reasoning in anticipation of a possible appeal – although she is under no obligation to do so.
Venue challenges are relatively rare in large corporate bankruptcies, despite a considerable amount of forum shopping that results in the filing of many large cases in Manhattan and Wilmington, Del. Still, the issue has been a subject of conversation and controversy among legal academics for some time (see “Bankruptcy Trends: Forum-shopping debate heats up again,” LCD News, March 25, 2011).
In many ways, the debate in the Patriot Coal motion mirrors the academic debate; namely, the balancing of a debtor’s connections to and business activities in a chosen venue (or the lack thereof) against the overall convenience of the parties involved in the bankruptcy case itself, such as creditors, attorneys, lenders and potential investors, among others. The key difference, of course, is that in Patriot Coal the stakes are tangible; Chapman ultimately will have to render a decision in the matter that not only will have to address abstract legal issues, but also will carry financial implications for the company and its stakeholders, as well as potentially setting precedent for future cases.
Patriot Coal filed for bankruptcy protection in Manhattan on July 9. Ten days later, the United Mine Workers, a union representing 42% of the company’s employees, filed a motion to transfer venue in the case to Charleston, W. Va., in the “interests of justice,” arguing that most of the company’s business and employees are located there, and that the state of West Virginia has a much more significant interest in the company’s reorganization than does New York (see “Patriot Coal union says Ch. 11 should be moved to West Virginia,” LCD News, July 19, 2012).
“No one mines coal in New York,” the union said in its motion.
The company (supported by numerous creditors) and several other key stakeholders, including the unsecured-creditors’ committee in the case, objected to the transfer of venue, responding that New York was a more convenient forum for most of the company’s creditors, the professionals working on the case, DIP lenders, and even the UMW itself, the headquarters of which is located in suburban Washington, D.C. “Experience has shown that the most frequent attendees at court hearings – by far – are the debtors’ professionals, the lenders’ professionals, and other material counterparties and their professionals, almost all of whom are located in New York in this case,” the company said (see “Patriot Coal defends its filing of Chapter 11 case in Manhattan,” LCD News, Aug. 29, 2012).
As for the company’s employees and retirees in West Virginia, Patriot Coal said the union “overstates the importance of the location of employees and retirees,” arguing, “It is not expected that more than a handful of employees or retirees would ever need to be present in this court.” And, the company said, “To the extent that union members – or any interested individuals – wish to monitor the proceedings, well-established technology will allow them easily and conveniently to do so.” More specifically, the company suggested that its employees and retirees could view proceedings via videoconferencing.
The UMW responded to those arguments, however, saying, “The objections give short shrift to the interests of justice standard and the principle that bankruptcy cases should be decided in a district with which the debtors have a connection.”
In seeking to focus the bankruptcy court’s attention on the “interests of justice” criteria, rather than convenience of the parties, the UMW argued that Patriot Coal’s reorganization is “not primarily about the rights of creditors, nor is it primarily about obtaining adequate financing.” Rather, the union contends, “As debtors have repeatedly declared, this is a case about their obligations to unionized workers and retirees and West Virginia’s interest in responsible environmental regulation of mining operations within its borders.”
The union also noted that anticipated Section 1113 and 1114 motions seeking to reject collective-bargaining agreements and retiree-benefit plans promised to figure prominently in the proceedings, concluding, “Where the business activity and relationships that gave rise to the labor costs and other liabilities at issue are rooted primarily in the West Virginia coalfields, it would not be in the interests of justice to uphold debtors’ blatant forum shopping.”
Meanwhile, the U.S. Trustee for the New York bankruptcy court also filed a motion arguing that venue should be transferred from the jurisdiction, on the grounds that the company’s creation of two New York subsidiaries shortly before its filing – apparently for the sole purpose of establishing venue in the state – was improper. Unlike the UMW, however, the U.S. Trustee did not urge a transfer to any other specific court.
Still, this represents the second large corporate case in a row in Manhattan in which the U.S. Trustee has raised questions regarding venue. This summer, the Trustee succeeded in having the prepackaged bankruptcy of Houghton Mifflin Harcourt Publishing transferred to bankruptcy court in Boston.
It is worth noting, however, the significant differences in the legal bases behind the Houghton Mifflin venue flap and those in Patriot Coal. In Houghton Mifflin, the U.S. Trustee argued that there was no legal basis for venue in Manhattan and that the bankruptcy court therefore had no choice but to either dismiss the case or transfer it to another court (see “Bankruptcy Trends: A look at the Houghton, Patriot Coal venue tiffs,” LCD News, Aug. 10, 2012).
Even so, Manhattan Bankruptcy Court Judge Robert Gerber refused to transfer the case until after he confirmed the company’s reorganization plan and allowed Houghton Mifflin to emerge from Chapter 11, ensuring that a venue transfer would not derail the company’s prepackaged plan that creditors unanimously supported. Only then did he move the case to Boston.
In Patriot Coal, neither the UMW nor the U.S. Trustee argues that Manhattan is an impermissible venue; rather, the venue transfer they are seeking is one based on the clear discretion of the bankruptcy court determining that there is another, more preferable venue.
In some ways, that puts Chapman in tougher pickle than the situation in which Gerber found himself, as she seeks to balance her view of the law’s venue requirements, wrapped in inherently ambiguous legal concepts like “the interests of justice” and “convenience of the parties,” in light of Manhattan’s preeminent position as a legal and financial center. Indeed, Manhattan’s position makes it a desirable and efficient bankruptcy venue of choice for large, complex companies, even those that may have relatively limited connections to the jurisdiction of the kind that typically form the bases of proper venue – companies such as Enron, WorldCom, General Motors, Chrysler, and, perhaps, Patriot Coal.
A more impartial court?
Two-way video monitors crowded Judge Chapman’s recently renovated courtroom, set up to broadcast the proceedings to courthouses in West Virginia and St. Louis, where miners, retirees, and employees at the company’s headquarters were able to watch – and only watch – the arguments made for and against the transfer.
Chapman made clear that the special broadcast was set up using existing courtroom equipment, at no cost to the estate. Per her custom, before the hearing began Chapman also read off a list of more than a dozen parties listening to the proceedings on the phone via CourtCall, a pay service often used by lawyers and financial parties instead of attending a hearing in person.
Patriot Coal lawyer Marshall Huebner, of Davis Polk & Wardwell, was first on the stand, offering a few prefatory remarks before turning the microphone over to the UMW lawyers, upon whom, he reminded the court several times, the burden of proof rested in this matter.
“There’s not really a disagreement about the facts,” said Huebner. “There may be very virulent disagreement about the interpretation of those facts.” He was right.
Susan Jennik, of New York firm Kennedy, Jennik & Murray, took the stand for the UMWA and began by noting that “hundreds” of mineworkers and retirees were watching from the courthouse in West Virginia. Chapman stopped her right there, asking that Jennik refrain from announcing how many people were watching remotely unless an accurate number could be provided for the record.
It’s worth noting that Chapman runs a tight ship. No joke she made, for example, went without a disclaimer, and she scolded lawyers for bringing snacks into her courtroom. She also asks a lot of questions, and it was rare for a lawyer to complete an argument without facing a barrage of queries and hypotheticals from her.
And Jennik, whose specialty is labor law, not bankruptcy, was interrupted more than anyone else.
Jennik’s argument hinged in large part on the experience with coal cases that judges in West Virginia have. “This industry is very specialized, particularly in the environmental damage that can be done in coal mining,” Jennik said. The business accounts for 12% of West Virginia’s gross state product. “I think the level of experience of those judges with those coal cases and the very specialized terminology would be a factor to be considered.”
It was a position that clearly held no sway with Chapman.
“This issue you’re raising, the familiarity, the fact that the judges have grown up with coal miners, that gives me some pause,” Chapman said. “In my mind, the tribunal should be completely impartial. It should be when the court doesn’t know the parties. … The fact that you’re asking me to transfer the case to a court you believe is more sympathetic, gives me pause. And for some reason, I can’t tell why, you imply this court would be less sympathetic.”
Jennik moved on to the question of convenience, but faced no less skepticism. The convenience of the professionals should not decide venue in this case, Jennik said. And while Chapman dismissed Patriot counsel’s suggestion that West Virginia was an inconvenient venue in part because planes to Charleston hold only 37 people, she also pointed out that “there are only so many seats in the courtroom, and it’s unusual to have a large number of workers and employees who attend.”
“I hear you,” she told Jennik. “I like being in the courtroom, but as a practical matter, how different would it be from what we have here today?”
“It’s an abuse of the statute”
Arguing for the U.S. Trustee, Andrea Schwartz took a different tack. “We’re asking the court to exercise the discretion afforded it by Congress, and in the interest of justice, transfer the case to another district where venue is proper.”
“Our motion is not complicated, and it is narrowly circumscribed,” Schwartz continued. “The cases before this court should not be here. The only reason they are here is that the debtors, with the assistance of Davis Polk, created two non-operating affiliates in New York solely to satisfy venue.”
“If the entities had formed six months ago, what would your position be?” Chapman asked. The same, Schwartz said. “We’re not contesting that they didn’t satisfy [the statute], we’re saying it’s an abuse of the statute.”
“This isn’t Houghton-Mifflin,” Chapman said. “Gerber agreed with you, even though everybody in the case was happy to have it here. This is a completely different case. It may be that management engaged in an analysis that it would be better for the company – not that this district would be more inclined to approve management bonuses.”
Patriot’s principal assets in New York amount to less than 3/1,000ths of 1% of its total assets, Schwartz said. “It was never intended that companies as huge as this could simply say New York is the best, it is the most convenient, it has the most consistency, has the best courthouses. I only have to form an LLC to establish venue. I don’t think that’s what Congress intended.”
The video feed to West Virginia needed to end at 5:00 p.m. EDT, bringing day one of the proceedings to an end.
Picking up again at 10:00 a.m. EDT on day two, Schwartz stressed that the U.S. Trustee is not asserting bad faith in Patriot’s establishing venue in New York, but said that Judge Chapman need not find bad faith in order to transfer the case. “If companies were allowed to create facts to fit the statute, then why have the statute at all?” she asked.
Reading tea leaves
Brian Meldrum, of Stites & Harbison, represents four surety movants with a total exposure of about $67 million – the penal amount of reclamation bonds covering Patriot Coal’s environmental obligations. “The nature of the debtors’ operations on the ground in West Virginia give West Virginia a unique and profound interest in the case,” Meldrum said. Of Patriot’s $3.7 billion in assets, $2.9 billion is in land and coal reserves, found largely in West Virginia.
But this, too, was of limited importance in Chapman’s eyes. “The coal is in the ground in West Virginia, absolutely,” she said. “Why does it follow inexorably from that premise that there’s any compelling reason for the case to be heard by a West Virginia judge? This court has presided over dozens, if not hundreds of cases involving very serious environmental issues. … So the argument that this court isn’t capable of hearing the facts and judging them, I don’t buy it.”
The proceedings took a sharp turn when Morgan Lewis partner John Goodchild came to the stand, on behalf of the 1974 Pension Trust of the UMWA, asking Patriot’s lawyers to identify any and all potential witnesses in the courtroom. “Until yesterday, I didn’t intend to call any witnesses,” Goodchild said. “Yesterday, it became clear in my view that Your Honor believes that there is more to the debtors’ intent than simply…”
“You don’t know what I believe,” Chapman interjected. “The court asks questions, and the only thing that happened yesterday was that you tried to read the tea leaves of what I was asking, and decided maybe you better call a witness because the moving parties didn’t discharge their burden.”
Chapman ultimately denied his request, but Goodchild outlined the questions he would have posed: Was there an analysis done regarding where to file the case, and what was that analysis? Who was involved in that decision, and who made it? When was that decision made? What information and considerations were taken into account in making that decision? What alternatives, in terms of venue, were considered? Why choose New York – what were the positives and negatives?
“I can say from bitter experience that my clients fare differently in different jurisdictions,” Goodchild added. “So the principle that the US Trustee is elucidating has a very real impact on my clients. … There are significant differences in the circuits in areas that do matter in this case.”
Forum shopping vs. forum selection
Returning to the stand to defend Patriot, Huebner offered a lengthy and multipronged rebuttal to the arguments of the first day and a half. His position would consist of six points, the last of which had 11 parts, he said.
But the point he returned to most frequently was the importance of finding a court that would approve Patriot’s $802 million DIP. “The financing is one of the reasons we filed in New York, because of the guidelines on roll-up mega DIPs, which West Virginia does not have. In one jurisdiction there is a much more robust track record, or experience, in large, weird exit financing. That was one of our calculations.”
Several times throughout the hearing, Chapman noted that she sees an important distinction between forum shopping and forum selection – running away from something as opposed to running to something. She reined in Huebner time and again when he overstated Patriot’s ties to New York, and reminded him that, for the miners, this case is “all or nothing,” while the large economic creditors will no doubt survive, even if they see a loss in this case. – John Bringardner/Alan Zimmerman